One of the more enduring misunderstandings which our firm finds in the healthcare employment world is independent contractor vs. employee. As you know, healthcare providers (HCP) can be either employers or potential employees. Many employers wish to escape liability for employment taxes, benefits, etc. so they believe simply labeling a worker as an independent contractor changes their character. Actually, the opportunity for misunderstanding is actually broader than the foregoing dichotomy, and involves four separate categories:
Common law employee
Failing to properly categorize an employee can lead the IRS (also state Employment Security) to demand payment of past employment taxes and penalties. You should consult IRS Publication 1976 concerning Section 530 Employment Tax Relief if you have mis-characterized an employee.
The first two categories hinge on the degree of control exercised by the “payer” (employer) and conversely the degree of independence demonstrated by the “payee”. For the category of independent contractor, the payer has the right to control or direct ONLY the result of the work. Critically, the payer has no right to direct or control the means and methods of obtaining the result. This test would mean that merely designating a worker as an independent contractor would fail, if in actuality, the payer controlled their activities. If you can control what will be done and how it will be done, the worker will be a common law employee. The common law employee should accordingly be treated as a catch-all category for those workers who are unable to be assigned to the statutory categories. The “employee” and “IC” lie on opposite ends of a spectrum. The closer your job characteristics are to one end or the other determine the category.
The terms “statutory employee” and “statutory non-employee” have no relevance to the healthcare industry, with one possible exception being a home-based billing service serving only your clinic. Consult with your CPA regarding the additional social security and Medicare rules that must be applicable for this potential exception.
When the IRS considers the status of a worker, they use guidelines pertaining to behavior control, financial control and type of relationship. The IRS has issued guidance in Tax Topic 760 and Publication 15-A, which discuss these factors as follows:
Behavioral Control involves the degree to which business directs and controls how the work is done through instructions, training, or other means. If the ND or other staff are being told when to be at the clinic, provided patients by employer, assigned to designated space, instructed on materials to utilize, the ND or staff will probably be considered under the behavioral control of the employer.
Financial Control involves the degree to which business controls or directs the financial and business aspects of the worker’s job. This includes extent to which the worker has un-reimbursed business expenses; extent of the worker’s investment in the facilities used in performing services; extent to which the worker makes his or her services available to the relevant market; manner of compensation; and extent to which the worker can realize a profit or incur a loss.
Type of Relationship includes ascertaining the existence of written contracts describing the relationship the parties intended to create; determining if the worker is available to perform services for similar businesses; ascertaining if the worker is provided with employee–type benefits, such as insurance, a pension plan, vacation pay, or sick pay; the permanency of the relationship, and the extent to which services performed by the worker are a key aspect of the regular business of the company.
Failing to properly categorize an employee can lead the IRS (also state Employment Security) to demand payment of past employment taxes and penalties. You should consult IRS Publication 1976 concerning Section 530 Employment Tax Relief if you have mischaracterized an employee.
In addition to the old fashioned virtue of legal compliance, designating a worker as an employee allows greater compensation flexibility under most “safe harbor” provisions for rebating and kickbacks. For instance, paying a non-employee naturopath on a percentage basis for patients directed to the ND by the payer for care is illegal. Paying an ND W-2 employee on the same percentage basis falls within a safe harbor if the employee is within the same financially integrated healthcare group.
In addition, when a HIPAA covered entity utilizes an independent contractor (IC) for patient services, they must ensure the IC signs and complies with a HIPAA qualified business associate agreement. Failing to do so can expose the payer to penalties under HIPAA-HITECH and by analogy under the state’s Uniform Healthcare Information Act. Even if non-HIPAA clinic must insure the privacy and security of patient information with independent contractors.